Advantages or Importance of Working Capital

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Advantages or Importance of Working Capital

  1. With the availability of adequate working capital, the regular supply of raw materials can be maintained along with the interpreted production.
  2. The company can avail cash discount facility on particular amount of purchases to maintain the capital flow. Thus, it also helps in overall cost.
  3. Getting loans are easy from banks or any other financial institutions (if required) under simple terms and conditions.
  4. Prompt Payment Policy helps the organization to have a goodwill in all its services
  5. During depression or emergencies, it is easy to maintain the financial requirements.
  6. This enables higher returns and helps in additional fund generation for the organization.
  7. It is easy to have an expansion of the organization after successful obtaining of higher profits.
  8. It supports in the improvement of morale among the employers and employees in the company.
  9. It helps in the encouragement of research programme.
  10. It helps in higher productivity with the precise utilization of assets at each and every step of production.

Disadvantages or Consequences of Inadequate Working Capital

  1. Without the availability of proper fund, no organization can pay its short-term liabilities. In this context, it has to borrow the amount at thehigher rate of interest.
  2. The organization will find it difficult to purchase its raw materials in bulk quantities. This leads tonottaking advantage of cash discount.
  3. As there is aninsufficient amount of working capital, fixed assets could not be utilized This leads to the rate of return on investment falls.
  4. If there will be the low-level liquidity of the organization, then it might lead to winding up of the organization.
  5. For any organization, it will be tough to get favorable market conditions to acquire profit or to grasp business opportunities.
  6. Inadequate working capital leads to lack of utilization of production facilities.
  7. It might have an impact on the reputation of the organization in the long run.

Disadvantages of Excessive Working Capital

  1. The excessive purchase may lead to unnecessary losses and waste of capital.
  2. With the available huge amount of capital, there is a possibility of rate of return goes down.
  3. Excessive working capital may lead to heavy loss of the firm.
  4. It will be difficult to maintain cordial relationship with financial organisations like Bank and other firms.
  5. It is possible to raise the bad debts in huge amount
  6. Excessive working capital might lead to excessive production that does not matchup with the demand.


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